Tax Havens Are Essential And Do Us All A Favor

Who among Sunday Telegraph readers has not tried to avoid paying
tax? I should imagine that most married readers keep their assets
in the name of the spouse with the lowest tax rate.

And I would be surprised if readers did not make use of pension
tax reliefs and the tax-free lump sum we receive from pension
funds.

Those readers who are self-employed will, no doubt, do their best
to ensure that they claim the maximum expenses against their
income. All this is absolutely right and proper. Our first
respon­sibi­lities are to our families, not the state, as long as
we give the state in taxation what we legally owe.

It might be thought that the use of tax havens by companies is
against the spirit and letter of the tax law – way beyond the
examples of personal tax avoidance we are all involved with.
Sometimes this is true. Whilst tax havens can – and should – be
defended, they should not be used to shelter illegal activity and
they should not be used by companies to pay less tax than they
legally owe.

For example, if a fictional company, We Make Widgets PLC, were to
operate in only two countries – the UK and Ireland, it could
register its ­intellectual property (a special method of
polishing metal, for example) in Ireland.

The Irish subsidiary could then charge a very high price to the
UK subsidiary for buying the rights to polish the metal. The UK
subsidiary would make very small profits and the Irish subsidiary
would make very large profits – and be taxed at Ireland’s low
corporation tax rate.

These internal “transfer prices” should accord with the rules. To
artificially reduce profits in high-tax countries would be like a
self-employed person taking his wife out to dinner and charging
it as expenses to his company. It would be legally and ethically
wrong.

Of course, there is a continual battle between HMRC and
international companies over these type of issues and that is
inevitable. It should also be remembered that, if companies pay
more tax than they need, then it is all of us savers who own
shares who suffer.

Tax havens are in fact essential, especially international
financial centres. Tax rules are often unjust, with non-taxpayers
(such as investors in ISAs) often paying tax or taxpayers from
overseas being taxed twice when they save money in investment
funds.

Non-taxpayers should not pay tax and nobody should be taxed twice
on investment returns. Of course, the offshore funds designed to
avoid unjust tax are often used by very rich people who are
mobile and have complex tax affairs across several countries.
However, they are also used by our own pension funds and ISA
pro­ducts to prevent investment returns being taxed when it is
very clear under UK tax law that they should not be taxed.

Indeed, it
would be to the detriment of us all if there were no tax havens.

Most predatory activity is actually undertaken by governments and
not by companies. Governments are trying to spend more and more
with the UK government now spending 50 per cent of national
income – in common with other European Union countries. This is
deeply damaging to general welfare and business in particular and
it is very difficult to hold the elites who con­tinually expand
the size of the state to account. Elections are very imperfect
mechanisms.

One effective method by which we can keep the size of government
in check is if labour and capital can exercise its freedom to
move to lower-tax jurisdictions. Capital is much more mobile than
labour and so tax havens do us all a favour by ensuring that
governments have to keep tax rates lower - thus creating a better
environment for business.

There is certainly a case for a much simpler tax system and
perhaps for a radical reform of corporation tax so that
shareholders and not companies are taxed directly. But tax havens
perform a useful function. They keep a check on governments and
they prevent ­ double­ taxation of investment returns. This
benefits us all. It is true that there may be some shady
behaviour designed to reduce taxes, but this is inevitable in a
world where taxes are so complex and governments try to extract
so much from their citizens.

Indeed, Britain should become a tax haven – both for companies
and for people.

Professor Philip Booth is the Editorial and Programme
Director at the Institute of Economic Affairs